Taming the dragon

A wave of Chinese investment is coming our way, and here is how to ride it

By Richard M. Sakoda
Special to the Star-Bulletin

China's economy, now the fourth largest in the world, is growing at about a 10 percent clip with few signs of slowing down. Annual foreign investment in the country is about $60 billion, and with Beijing to host the 2008 Olympic Games, there appears to be no better time than now to put money into the country.

China's economy, now the fourth largest in the world, is growing at about a 10 percent clip with few signs of slowing down. Annual foreign investment in the country is about $60 billion, and with Beijing to host the 2008 Olympic Games, there appears to be no better time than now to put money into the country.

Looking outward, China also is in a position to follow Japan's lead and invest heavily in the United States, particularly Hawaii. Here are some of the questions investors may be asking themselves:

Question: "What are some of the investment opportunities for small- to medium-sized U.S. businesses in China?"

Answer: Although there are many business opportunities in China, I will focus on four different categories of investment opportunities in China: The joint venture, real estate development, import and export, and business investment.

Joint ventures

There are four types of joint ventures in which the U.S. partner is being asked to invest money, technology, equipment, management.

1 -- A Chinese partner looking for a joint venture U.S. partner for purposes of expanding its market in the United States.

In this situation, the Chinese partner is looking for a U.S. partner with existing U.S. distribution channels and an interest in having its products manufactured in China. In this case, the U.S. partner is asked to transfer its distribution channels and equipment to its Chinese partners' base of operation. This is ideal for a U.S. partner having a difficult time remaining financially solvent. The added benefit for the U.S. partner is that this also will open an opportunity to sell its line of products in China as well.

2 -- A Chinese partner looking for new technology.

In this situation, the Chinese partner is willing to invest the funds required to open and operate the business, if the U.S. partner provides technology and, in some cases, the management to handle the new business in China. This is ideal for a U.S. partner that has a new technology it wants to introduce to the Chinese market with the Chinese partner assuming the financial risk.

3 -- A Chinese partner looking for a U.S. partner to provide money, new distribution channels and management. For government-owned Chinese businesses, it is ideal to joint venture with a U.S. partner who can provide funds, new distribution channels and take over management. The funds will be required to increase the manufacturing capacity of its factories to take on new distribution channels. Just as important, or maybe even more important, is the transfer of management of the manufacturing facility to the U.S. partner. This helps the government-owned operations become more efficient and profit oriented.

4 -- A Chinese partner looking for U.S. partner to invest funds in order to secure a government-issued license.

Real estate development

There are three types of real estate development to consider:

1 -- High-rise and residential development project.

With the Chinese government pushing private home ownership and the growing wealth of its population, there is a tremendous opportunity for large real estate companies to develop residential real estate projects in China.

2 -- Commercial office building development projects.

With many multinational insurance companies, investment firms, banks, accounting firms and banks opening offices in China, there is a growing need for more office and commercial.

3 -- Recreational facilities.

It is estimated that 2 billion people will be traveling within China during Chinese New Year's. For many of these travelers, they will be seeking recreational facilities to visit or to bring a visiting guest. Ideal facilities to meet this need include golf courses, gaming facilities and theme parks.

Import and export

1 -- The Chinese government is pushing many of its larger manufacturers to establish their name brands in the U.S. market. For U.S. import companies, this is an excellent opportunity to secure exclusive representation for such a company seeking to establish its brand name.

2 -- Competition within China is pushing manufacturers to expand its market to the United States and beyond. This will provide export companies an opportune time to develop business relationships with manufacturers in China.

3 -- For Hawaii companies wanting to establish a market for its products, now is a good time to introduce their products, as more and more Chinese visitors visit Hawaii.

Business investment

1 -- Professional services.

There is a tremendous need for dental services in China. This is an ideal opportunity for a dental group to invest in working with a local dentist to open a dental clinic in China. This opportunity also extends to cosmetic surgery.

2 -- Fast food operations.

The Chinese consumer is looking for new U.S. fast-food operations to try. The market for fast food is wide open with only KFC, McDonald's, Pizza Hut, Subway and Starbucks in the Chinese market at this time. There also is a place for the Jiffy Lubes of the world to service the millions of cars being purchased in China.

Question: What type of Chinese investments do you foresee happening in Hawaii in the next few years? And what will be the difference with the Japanese investors?

Answer: Similar to the Japanese economic invasion in Hawaii a few years ago, I anticipate some very similar investment patterns: Chinese tour companies establishing their presence to handle Chinese tour groups; Chinese investors investing in hotels and catering to their Chinese tourist; specialty Chinese restaurants opening up to serve Chinese tour groups; Chinese karaoke and entertainment establishments springing up to cater to Chinese tours and residents; Chinese investors purchasing office buildings to house their corporate Chinese clients; Chinese investing in residential units for their families; more television stations like ImaginAsian network will appear on cable to serve the growing Chinese community; and Chinese purchasing golf courses in Hawaii to cater to their golf tour groups.

The difference with the Japanese investment wave will be that most of the Chinese investment will be long term, focused in downtown and areas close to Chinatown. In fact, I envision Chinatown expanding well beyond its present size. Also, more condominium and office buildings being built in the Chinatown and downtown area to handle the growing Chinese demand for housing, commercial and office space. Chinatown will in time become a major economic force and integral part of the downtown business district.

The Chinese will invest in a few four- to five-star hotels. However, for the most part, the Chinese will invest in three-star hotels. The typical Chinese tourist is satisfied in staying at a three-star hotel.

Many of the private schools will be overwhelmed with applicants of Chinese businessmen whose families are living or stationed in or have moved to Hawaii. There also will be an increased demand for Mandarin classes in public and private schools and an increased interest in private music lessons for Chinese students.

Other foreseeable things happening in Hawaii as a result of the influx of Chinese investments will include the opening of international banks, the creation of an international Wall Street, an international court and the opening of a China Embassy and other embassies in Hawaii.

Question:What is the time table for investing in China and when will the wave of Chinese investment begin?

Answer: Now is the time to invest or to create business relations in China. The 2008 Olympic Games will put China on the map. Visitors and the world viewers will be overwhelmed by how fast China has caught up with the rest of the world. There will be a tremendous interest in finding investment opportunities after the Olympics. Accordingly, anyone interested in investing in China after the Olympics will find it much more difficult and competitive.

The wave of Chinese investment already has begun. The Chinese government is selectively allowing funds to leave China for certain types of investments. The investments have involved transportation, energy and high-tech. On a much smaller scale, real estate and businesses in the United States are being purchased by Chinese investors. Once the RMB value changes in relationship to the U.S. Dollar and the government lessens its restrictions on funds leaving China, the wave of investments will begin. The Chinese tsunami of investment will make the Japanese investment wave of a few years ago look like a ripple in comparison.

With the dawning of each New Year, China's economic and political power grows exponentially and extends beyond its shores. We in Hawaii have a choice to either watch as the Chinese investment tsunami rolls in or to be riding that tsunami as it comes ashore. For me, the latter is where I plan to be and smart businesses should plan to be.

Richard M. Sakoda is chief executive of the Sino-Hawaii Association of Businesses and Manufacturers Inc. He can be reached at sakodaesq@aol.com